December saw financial markets extend the gains made in November as evidence grew that the global economy was recovering strongly in the second half of the year and was supported by further positive vaccine news. We believe investor positioning has remained highly defensive with wide valuation dispersion suggesting that a gradual return to normal economic conditions once a vaccine is rolled out should allow for further outperformance of cyclical and financial ‘value’ sectors. However, increased investor optimism that a vaccine should ultimately end the nightmare Covid has unleashed was tempered in the month by the acceleration in cases of the new, highly contagious variant of the virus that has resulted in a third national lockdown in the UK. This will lead to another quarter of subdued economic growth and offset the positive news that a Brexit trade deal had finally been reached. As such, fears of queuing lorries at Dover did materialise but not on account of a hard deal Brexit. Sterling has performed strongly with the sterling-dollar exchange rate reaching a 30-month high reflecting improved sentiment towards the UK. It is worth highlighting that the deal struck covers goods but not services, a far larger part of the UK economy, and agreements over access in this area will be next on the political agenda. Nonetheless, the agreement removes a large amount of uncertainty and provides a framework that should allow greater confidence for businesses to invest. A second political development that could have implications for financial markets has been the narrowing of the US Senate election race in Georgia for its last 2 senators. It now looks probable that the Democrats will secure a majority in both houses making it much easier for President-elect Biden to push through his programme of legislation. In particular, increased stimulus both to support low-income families and a major infrastructure investment programme looks more likely to proceed. The impact, so far, has been most clearly seen in bond markets where the US Treasury yield has gone back above 1% and further supports a rotation in value sectors of the market.

During the month the TB Wise Multi-Asset Income fund rose 5.6% compared to a rise of 2.6% for the IA Flexible sector average. Whilst we are encouraged that recent positive news over the vaccine and the Brexit trade deal has seen the fund’s performance improve markedly over the last 6 months, we are highly aware that performance across the year has been disappointing and unusually volatile. In addition, the fund’s income has suffered given the unprecedented levels of dividend cuts within our direct equity holdings. Over the year the fund fell 9.9% compared to a rise of 0.4% for the Consumer Price Index and 6.7% for the IA Flexible Sector. The performance of the fund over the year was closer to that of the UK equity market reflecting our belief at the start of the year (pre-Covid) that having a high allocation to domestic equities should provide both higher levels of income and value upside. Whilst the outlook domestically remains clouded by the lockdown for the first quarter of the year, we believe investors will look beyond this to a post-vaccine investment environment that combines strong economic recovery with low cyclically-adjusted valuations.

December saw strong performance across a number of our Investment Trust holdings. UK investment trusts Temple Bar, Aberforth UK Smaller Companies and Schroder UK Midcap all saw strong growth over the month. Our commodity holdings, Blackrock World Mining and Rio Tinto performed very strongly as commodity demand from China proved very robust and iron ore producer Vale reduced production expectations, pushing the commodity price higher. European Assets Trust and Aberdeen Asian Income also performed strongly reflecting strong underlying performance combined with discounts narrowing. Our property holdings, Standard Life Investment Property Income and New River Reit, performed well as investors digested last month’s results from the latter and the news that the former had sold 10% of its portfolio at the latest NAV valuation whilst the shares started the month at a 30% discount to NAV. Despite the disruption the current lockdown will bring, we believe the property sector has some of the best recovery prospects within the fund once tenants are able to return to trade normally and anomalously wide discounts narrow. A number of our direct financials holdings also performed strongly on the back of the Brexit deal and investors no longer extrapolating Covid disruption into perpetuity. We highlighted the valuation anomaly here last month and believe there remains significant scope for valuations to recover further.

Over the month we chose to slightly increase the cash level within the fund reflecting the strong short-term performance, the fact several catalysts have played out and given the uncertainty of the third wave of the virus. Discounts on Temple Bar, Middlefield Canadian Income, Princess Private Equity and Blackrock World Mining have narrowed significantly so we took the opportunity to trim our holdings. We also reduced our holding in Man GLG Income following strong performance. We added to Standard Life Investment Property Income where we think the dividend yield is well covered by rental payments and the strong balance-sheet positions it well for the future. There was further encouraging news regarding dividends in the month. Paragon returned to paying a dividend and regulators announced that they are happy for banks to return to paying dividends and undertaking share buybacks if prudent. This bodes well for our holdings in Natwest and Standard Chartered. Our latest calculations (based on portfolio holdings and information as at 31 December 2020) suggest the portfolio can produce a weighted yield of approximately 4.4%* in 2021.

* Yield is calculated as a weighted average of forecast yields of individual holdings in the fund based on their individual financial years ended in 2021. It is therefore not a forecast yield for the TB Wise Multi-Asset Income Fund and is not guaranteed.

Philip Mathews31 Dec 2020
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